Since the very beginning of the year 2020, we have been witnessing a downfall in global oil prices. China, which is a major oil importer contributing for more than 22% of total world oil imports, started to shut down its manufacturing industries to contain the spread of Novel coronavirus. Extended lockdown of China resulted in a sharp fall in US Oil prices in addition to 5% import tariff imposed on oil import from the USA. It was a trigger point of the slumping crude oil prices and the situation kept on getting worse. Russia is a strong opponent of the USA started producing oil in excess of demand and the oil price war started between Saudi Arabia and Russia.
In February 2020 United States of America had imposed sanctions on Russia’s biggest oil company Rosneft Trading for its continued support in selling Venezuela’s oil (A country in South America). Russia’ was angry with this move of the US already and wanted to get Saudi Arabia it’s side to inflict some economic pain on US shale oil producers.
In the year 2018, Russia and OPEC had entered into an agreement that they would together regulate their oil production as well as the prices in synchronization with each other. Meaning to say in order to derive profit they could cut down the production so as to increase the price of the crude oil and vice-versa.
OPEC- Organization of the Petroleum Exporting Countries was formed in 1960. OPEC is a permanent intergovernmental organization headquartered in Viena, Austria. It has 13-member nations- Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, Venezuela, Angola, Congo, Algeria, Gabon, Equatorial Guinea and Iran. Oil prices had their biggest slump since the 1991 Gulf war and the Crude oil market experienced a 68% fall in price in march 2020 as against January 2020.
To counter the situation of falling oil prices due to COVID- 19 pandemic, in the first week of march OPEC, scheduled a meeting to discuss upon reduction in oil production. OPEC led by Saudi Arabia members decided to cut down the oil production by 1.2 to 1.5 million barrels a day and proposed that Russia should be responsible to scratch out 0.5 million barrels per day.
However, OPEC+ members meeting did not end on a positive note neither for Russia nor for Saudi Arabia. Russia, in order to wage a price war against US Shale oil production, kept on increasing the oil production despite reduced demand. This eventually led to a fallout in the oil prices. Saudi could not take it easy, it decided to cut down its oil price, ramp up the oil production. This event started the oil price war against Russia which eventually led to a decline in oil prices around the world.
Similarly, in the past, there were price wars between Saudi Arabia and other countries, where again disputes over market power have sparked massive production despite collapsing demand. In 1997, it lasted for nearly 17 months and in 2014 it lasted for 22 months.
Russia has a very low budget breakeven price for oil, which is US$ 40 as compared to US$85 for Saudi. According to the recent data of oilprice.com Russia can produce over 11 million barrels per day (mbpd) of oil and for Saudi only 8 mbpd. Russia can cope with oil prices as low as US$25 per barrel from a budget and foreign asset reserves perspective for up to 10 years; Saudi can manage 2 years at most. But even 2 years are too much for this world to cope up with. It was, however, estimated by FORBES that Russia will incur a loss of USD 100 million per day.
The low price and oversupply of crude oil squeezed out many smaller production companies from the markets and resulted in factories shutting down in the United States. Donald Trump, the President of the United States of America, facilitated an agreement between OPEC+ nations and Russia in the 2nd week of April, 2020. Both parties agreed to slash their oil production by 9.7mbpd in May & June, 2020.
